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My cheap car makes me feel rich

13 November 2020

This is my car:

It’s a 2005 Subaru Legacy.

If I sold it today, I’d be lucky to get $6,000. (It’s the 3-litre version with leather etc.)

This is my wife’s car:

It’s a 2015 Toyota Highlander. She loves her car: it sparks joy.

My car doesn’t spark joy.

There’s nothing wrong with my car. A lack of Bluetooth kind of qualifies, but I could solve that pretty easily, and it’s not a biggie in the scheme of things. In fact, there’s a lot of good things to say about it. It hasn’t given me any problems at all. It’s nice to drive. It’s a versatile car. I’m partial to the white leather interior. It makes me seem sporty when I have bike racks on the roof.

The longer I keep it, the richer I feel. 

I can afford to buy a new car, but I can’t justify it

It wouldn’t be hard to replace my car. I can afford to do so. But I can’t justify it.

I’ve given it a fair amount of thought. For instance, if I were to buy a new car, my very-random-short-list is:

  • A first- or second-generation Porsche Cayman. Unfortunately, this would be less a replacement and more of an additional car, since it only has two seats. This would mean doubling (or tripling) up on a lot of the ~fixed costs of car ownership: an additional set of expenses relating to registration and insurance, etc. I also can’t help but be concerned about mechanical issues, and the potential costs since its engine isn’t especially accessible (it’s mid-engined: ie, behind the seats. Great for handling, less so for practicality). I can’t really justify it – especially for something that, if I’m honest, is ultimately a symbol for the lack of autonomy and freedom I don’t have, so long as I have young children.
  • A ~2009 Porsche Panamera. (Let’s not pretend a 911 is a proper 4-seater.) For what they are, first-generation Panameras seem like a terrific deal for around $40,000. I may also be in the minority in the sense that I like the way they look. I’m just too risk averse; I’d be especially concerned with problems relating to electronics. It would spark joy, but it could just as easily spark anguish and annoyance.
  • A Mazda CX-5, probably around 2016 model. This is the most practical/likely option. I could probably get something that would make me happy for $22,000 or so.
  • A Lexus IS250 or IS350. I like Lexus: the marriage of Toyota reliability with more luxurious appointments. I especially like Lexus’ more recent, aggressive styling (the “Darth Vader” grills), which you see from around the mid 2010s. I’d probably be looking at around $25,000. These cars aren’t as practical as a CX-5, since it’s not 4WD, and it wouldn’t provide me with the same visibility when I drive out of my driveway (which is sometimes busy, with views blocked by parked cars). But it’s probably the most affordable option that would spark joy.
  • A Lexus RX350, especially from 2016 on. I’ve always been partial to the RX350, but there’s something I really like about the styling since 2016. For this, I’d be looking at $50,000 or so.

You’ve probably noticed that all of these cars are second hand. I’m not especially interested in buying a new car. My wife and I have done that. (It was a 2009 Mazda3 SP25. We loved that car. But it got the “new car” bug out of our system.) I’d rather get a car that has been pre-owned and that has got the lion’s share of its depreciation out of its system. Even from a day-to-day enjoyment perspective, I’d rather a second-hand car, where I don’t have to worry about anything that stops the car from being “pristine”.

Calculating the trade-offs: capex vs opex 

The problem with upgrading my car is that I can’t justify the cost. Even upgrading to a $15,000 car involves trade-offs I’m not prepared to make at this point in time.

I recently wrote about distinguishing between “capex” (capital expenditure) and “opex” (operational expenditure) for personal expenses. When buying expensive items, such as cars, it’s often a good idea to break down the cost of ownership in terms of day-to-day (or year-to-year) operational expenditure, rather than focus on the capital expenditure. Taking this approach makes it easier to compare and contrast the costs, including the costs of doing nothing (since doing nothing is still a decision).

Whether you own a beater or a beauty, there are ~fixed costs of car ownership. You have to pay rego. You will always have to pay for petrol (although admittedly, some cars will cost more or less for the same amount of driving: we call my wife’s car “the alcoholic”, because it’s always thirsty). You will have to pay for some form of insurance (although the more expensive/exotic the car, the higher this is likely to be).

Depending on how much the car in question is worth, the big costs are likely to be:

  • Depreciation. The more expensive your car, the greater the cost of depreciation. Let’s assume a depreciation rate of 10% per year. On my $7,000 car, that’s a cost of $700 this year. For a $50,000 car, that’s $5,000. That’s $15 per week versus $100 per week. 
  • The cost of capital. If you borrow money to buy a car, the cost of capital is obvious: it’s the interest you pay on the principal you owe. (I’m more sanguine about this than I have been in the past, especially if you’re paying mortgage rates: more on that another time.) But even if you pay cash, there are opportunity costs to using those funds. Let’s say I buy a $50,000 car, and can trade-in my current car for $7,000. That’s $43,000 that I’ll be using to buy a car that could be used elsewhere. Let’s say I could have invested these funds and generated a 5% return on investment. 5% of $43,000 is $2,150 per year. Somewhere in the multiverse there is Sonnie-with-a-$50,000-RX-350, and elsewhere there is Sonnie-with-a-$7,000-Subaru-Legacy. The Sonnie with the Subaru is likely to be better off by $2,150 per year – or be able to spend that money on other things.

What is interesting about these expenses is that they are largely invisible. You don’t pay them out of your bank account. Depreciation doesn’t strictly come out of your pocket (except when you sell or trade-in the car, but it’s easy to ignore this). The cost of capital is largely abstract. It has real-world consequences, but only in terms of what your position would have been otherwise: we don’t live our life in counterfactuals.

These costs add up. If I ignore differences in rego, insurance, maintenance, fuel, etc, and simply look at depreciation and the cost of capital, the operating cost of owning the $50,000 car is around $7,000 more per year. That’s roughly $150 per week.

If I compare owning my $7,000 car with, say, a $22,000 car, the annual difference is probably closer to $2,300, or $50 a week.

What could I do with $150 per week?

Depending on your financial circumstances, $150 might seem like a lot, or it might not seem like much. Depending on your values and priorities, owning a much nicer car might be worth this price.

Realistically, $150 is very doable for my wife and I. We would still be in a very reasonable financial position. We probably wouldn’t even notice $50 – it would probably be rounding error in terms of what our children or grandchildren inherit when we die (if we die…).

At the moment, however, owning a nicer car isn’t worth the trade-off. My current car is perfectly fine.

These are some of the things I think about when it comes to the trade-offs.

This includes the boring long-term financial impacts, by reducing our savings rate in our flawcast spreadsheet. Saving $150 per week at this point in my life might even mean being able to retire many months earlier.

It also includes being able to buy small- to medium-sized products and services with less guilt:

  • Not having to think twice about buying a $10 book on my Kindle.
  • Not feeling so bad about buying a new pair of Nike or Adidas sneakers.
  • Periodically giving $50 or so to a cause I care about, or to one or more loved ones.
  • Spending the money on gifts for others.
  • Going to cafes and cheap-and-cheerful restaurants without having to worry about how much I spend.
  • Buying gadgets which individually might seem expensive, but in combination aren’t nearly as expensive as, say, spending $50,000 on a set of wheels.
  • Engaging the services of other professionals, such as a health coach (as distinct from a personal trainer: highly recommended) and nutritionist (a great “forcing function” to talk and think about something that may be relatively simple (“Eat food. Mostly plants. Not too much”), but isn’t necessarily easy).

It just means I can be less worried about day-to-day finances.

When I think about all of these trade-offs, having a cheaper car makes me feel richer.

In large part, owning a cheaper car makes me feel richer because my definition of wealth isn’t about driving a nice car. My definition of wealth has more to do with having options in life.

I wouldn’t be surprised if the balance shifts, and I end up buying a ~$20,000 car (probably a CX-5) at some point in the foreseeable future. I will probably wait a few more years for the RX350 to depreciate (but by then, my needs in a car may have changed so I’ll be onto the next shiny thing).

But who knows. A big part of this is the perennial question of how much to enjoy today, while planning for the future. Maybe I’ll have a health scare, something will happen to a loved one, or I’ll lose more faith in the future of humanity, which will steer me towards the more hedonistic “eat, drink, and be merry, for tomorrow we die” end of the spectrum.

Regret

I like the idea of using a “regret minimisation” framework when making decisions.

I’m not a big one for feeling regret. But the reality is, we will always have regrets. As Arthur Miller said, the key is to have the right regrets.

Am I going to regret owning a car I love? What is the likelihood that I’ll be sad I didn’t drive cars I loved?

Am I going to regret not being in a better financial position? What is the likelihood I’ll curse that decision?

As I write this article, the answer is clear. Although I’m the first to say that my answer may change sooner than later. Whatever I end up doing, now or in the future, I have some solace that I’m asking the right questions for me, and I’m framing them in the best way for me.

What is your thinking process? 

I share this article to provide some insight into my own thought process when it comes to keeping or buying my car.

Your concerns and priorities will be different, but I hope it provides you with something more to consider. As always, if you have an additional perspective, feel free to let me know.



Tags

capex, capex vs opex, cars, defining wealth, opex, priorities, wealth


About the author 

Sonnie Bailey

In his spare time, Sonnie likes telling people that he’s a former Olympic power walker, a lion tamer, or that he is an orthodontist. He is none of those things. In reality, Sonnie is a financial planner based in Christchurch. Through his business, Fairhaven Wealth (www.fairhavenwealth.co.nz), he provides independent, advice-only, fixed-fee financial planning services. Sonnie is a “recovering lawyer”: he has specialised in trusts and personal client work. He has also worked as a financial services lawyer for many years.

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